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Fitch Expects to Rate Cooper U.S. Inc.'s New Sr Unsecured Debt 'A'

^{Published on 2010-12-03 05:45:53 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings expects to assign a rating of 'A' to Cooper U.S., Inc.'s, a subsidiary of Cooper Industries plc (NYSE: CBE), planned $250 million senior unsecured fixed-rate notes due in 2016 and $250 million due in 2020. The Rating Outlook is Stable. CBE intends to use proceeds to fund recent acquisition activity and for general corporate purposes. A full rating list is shown below.

As a result of the issuance, leverage is expected to increase to within a range of 1.6 times (x) to 1.8x from recent levels at Sept. 30, 2010 when debt/EBITDA was 1.1x. Fitch anticipates that leverage should improve slightly to around 1.5x by the end of 2011 as end market demand, other than commercial construction, continues to recover. Fitch considers CBE's projected leverage to be slightly weak when compared to other 'A' rated companies but still within appropriate levels for the rating category. Concerns about higher leverage are mitigated by CBE's operating performance and its conservative financial policies.

CBE's current financial flexibility allows for the expectation that the recent increase in acquisition spending should continue into 2011. The company's financial flexibility is supported by consistent free cash flow and ample liquidity. At Sept. 30, 2010, liquidity included cash of $296 million and full availability under $350 million of bank facilities, offset by $10 million of current debt. In addition, the company's total pension liabilities were slightly over 76% funded as of Dec. 31, 2009, and no material contributions are expected over the next couple of years.

The ratings are based upon CBE's stable cash flows and diverse product lines. In the first three quarters CBE's sales were up by 2.5%, excluding tool segment revenues. Operating results are expected to improve in 2010 as sales increase due to improving industrial and utility end markets offsetting the declines in the commercial construction market. The company's sales to industrial end markets are anticipated to recover by mid-single digits in 2010 due in part to acquisition activity and international growth rates. Similar to other diversified industrials, international growth rates have been stronger than domestic rates for CBE throughout 2010 and this trend should continue into 2011. A significant part of CBE's international exposure is in industrial, utility and commercial construction end markets.

The weakening in commercial construction markets appears to have reached the bottom of the cycle during the current year, but demand is not expected to recover until possibly 2012. However, CBE's strong presence in the energy efficient lighting markets, including LED, should continue to partially offset some of the anticipated weakness in the U.S. non-residential market.

Also contributing to the anticipated improvement in results should be stronger operating margins resulting from cost containment actions and increased volumes. Segment operating margins have continued to improve slightly through the first three quarters of 2010. Fitch anticipates segment margins will further increase due to revenues increases, reduced restructuring expenses and the reclassification of the lower margin tool segment in the current year. Strategically, the tool joint venture allows CBE to focus solely on managing and growing its Electrical Products businesses, while maintaining the diversity this larger tool company will provide. CBE's free cash flows after dividends could decline by a little over $100 million in 2010 to increased working capital requirements more than offsetting higher funds from operations compared to the $458 million generated in 2009.

Other rating concerns include asbestos liabilities and the potential for increased leverage related to additional share repurchases. The risks related to the company having to settle a significant asbestos claim is primarily offset by the continued declines in claims outstanding and the immaterial affect claim settlements have had on cash flows in recent years. Net of insurance proceeds, CBE received $24 million in 2009 and paid approximately $1 million in 2008 and $18 million in 2007. For the next few years, Fitch estimates that annual settlements will remain in the $20 million-$30 million range.

Fitch's ratings for CBE are as follows:

Cooper Industries plc

--Issuer Default Rating (IDR) 'A';

--Senior unsecured bank credit facilities 'A'.

Cooper Industries, Ltd.

--IDR 'A'.

Cooper U.S., Inc.

--IDR 'A';

--Senior unsecured bank credit facilities 'A';

--Senior unsecured debt 'A';

--Short-term IDR 'F1';

--Commercial paper 'F1'.

The ratings affect approximately $933 million of debt outstanding at Sept. 30, 2010.

Additional information is available at '[ www.fitchratings.com ]'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

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